Is the Individual Mandate Severable?

When the Supreme Court considers the health care reform law in March, one of the main issues will be whether the “individual mandate” – the requirement to obtain government-approved health insurance or pay a penalty – is constitutional. If it’s not, the next issue will be whether it is possible to hold the individual mandate unconstitutional, but let the rest of the health care law – or at least most of it – stand without the mandate.

The idea behind the individual mandate is that without it, healthy people would refrain from buying health insurance, leaving the insurance pool filled primarily with people who have high average health care costs. This would increase average health care spending for the group who actually have insurance, and therefore increase premiums. With guaranteed issue and community rating – that is, with no exclusions or premium increases due to pre-existing conditions – it would be easy for people to wait until they “need” insurance before buying it. This would increase premiums, perhaps to the point that it wouldn’t even be worth the cost for many people with significant health problems – and that’s putting aside the issue of how many people could afford the more-expensive insurance. The individual mandate seeks to solve this problem by forcing everyone to buy insurance whether they want to or not. By keeping healthy people in the insurance pool, premiums will be lower for those who need health care. In effect, the healthy will subsidize the sick.

Even the administration concedes that the individual mandate is not severable from the prohibition on considering pre-existing conditions. If the individual mandate is unconstitutional, the much-touted ban on pre-existing condition exclusions has to go as well. But how does the mandate interact with the rest of the long, complex, 2700-page law? A group of 103 economists led by former Congressional Budget Office Director Doug Holtz-Eakin and including two Nobel Prize winners has filed an amicus brief arguing that the individual mandate is so intertwined with other provisions that it can’t really be separated from the rest of the law, either. (Full disclosure: I am one of the 103 economists.)

These economists’ brief argues that by increasing enrollment in insurance coverage the mandate provides significant financial resources to insurance companies – resources they will need to pay new taxes and increased health care costs also imposed by the same law. The new law requires substantial “minimum” health care benefits to be provided, which for many insurance plans is more than they currently provide, as well as coverage for “children” up to age 26. It bans deductibles and copayments for certain preventive services, limits overall deductibles and copayments, and bans annual and lifetime benefit limits.

In addition, the law has certain provisions that will increase the amounts insurance companies pay for their members’ health care. There is a 2.3% excise tax on medical devices, and an “annual fee” tax of $2.5 to $4.1 billion per year on the pharmaceutical industry (apportioned based on market share). Much of those taxes will be passed along to insurance companies in the form of higher prices.

There is also an “annual fee” tax on health insurance itself – starting at $8 billion for 2014 and rising to $14.3 billion in 2018, and indexed to growth in premiums thereafter.

These increased net costs are estimated to total about $360 billion between 2012 and 2021. Where are insurance companies going to get the money to pay all these taxes and increased costs? Well, one possibility is from premiums paid by healthy enrollees – precisely those who are the target of the mandate. One economic model estimates that increased premium revenue from the individual mandate will be about $366 billion over that same time period – and given the inherent uncertainty in economic projections, that’s about as close to a perfect balance as one could hope for.

In other words, the individual mandate is not only necessary to preserve the pre-existing condition exclusions, but also to keep insurance companies solvent in the face of numerous other provisions of the bill.

Whether it is good policy to artificially increase costs in what is already the most costly health care system in the world, is not the question before the Court. Nor is the Court asked to decide whether it is fair to pay for those cost increases by penalizing the uninsured with penalties. The President, and the Congressional Democrats who voted for the law in March 2010 have already determined that in their view at least, these are the right and fair policies.

The question before the Supreme Court is whether the requirement to buy health insurance is constitutional, and if not whether it can be meaningfully separated from the complex balance of other provisions in the law. The economists’ brief argues that the “Court should not engage in a line-by-line analysis of whether particular individual provisions of the 2,700-page Act are or are not sufficiently independent from the individual mandate to be severed from it.”

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